CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION Facilitating Access to Finance for Household Investment in Sanitation in Bangladesh August 2016 Summary Overview CHINA BHUTAN Location: Bangladesh, South Asia NEPAL Approach to Blended Finance: The provision of an output-based aid (OBA) subsidy to microfinance institu- tions (MFIs) in Bangladesh is used to help MFIs develop BANGLADESH sanitation products and extend their reach to poorer households. INDIA Microfinance (the provision of financial services to MYANMAR low-income people) is emerging as a viable avenue to facilitate increased access to finance for households to water and sanitation products, and for small-scale water service providers’ business development. OBA THAILAND is a form of results-based financing where subsidies are paid to service providers based on verification of pre-agreed water and sanitation project targets defined during project design, thereby offering a strong incentive for the delivery of results. Combining an OBA subsidy with a microfinance loan helps reduce households’ cash water connection IBRD 42432 can be prohibitive. Businesses operat- | AUGUST 2016 constraints by spreading repayment over time, and ing in the rural sanitation sector are very small, which makes investment in improved sanitation more affordable inhibits their ability to develop better-suited latrine models overall. and to access credit. These businesses are unable to offer poor households the option of paying in installments and of spreading purchase costs over time. Microfinance Context institutions (MFIs) are well positioned to help on this front, as they provide financial services across their client net- Bangladesh has made progress in improving sanitation works, and can tailor loans to meet local needs. nationwide, with an open defecation rate reduced to one percent of the population. However, as of 2015 only 61 Over the last few years, the World Bank has been work- percent of Bangladeshis relied on improved sanitation ing in partnership with the Government of Bangladesh facilities according to JMP statistics. to support its sanitation initiatives and encourage private sector involvement in rural sanitation. A pilot sanitation In Bangladesh, households primarily invest their own marketing initiative to leverage private sector resources financial resources in latrine purchase and installation. and help households adopt improved sanitation was Many have the ability (and often willingness) to invest in implemented in Bangladesh in 2009, and was scaled up building improved sanitation facilities but they are often in 2011 after successful results. cash-constrained. The upfront costs of a toilet or piped Case Studies in Blended Finance for Water and Sanitation: Facilitating Access to Finance for Household Investment in Sanitation in Bangladesh Financial Structure and Approach to latrine construction. The cost of the latrines built under Blended Finance the program range between US$45 and US$220, but the subsidy only applies to loans up to US$128, as a way In 2016, the World Bank approved funding to an output- to ensure that comparatively richer households do not based aid (OBA) program which channels OBA sub- divert the subsidy to finance more expensive installations. sidies to two leading MFIs, the Association for Social Advancement (ASA, the second largest microcredit lend- Figure 1 shows the financial structure for the OBA ing institution worldwide) and the Palli Karma-Sahayak program. Foundation (PKSF, the Government of Bangladesh’s wholesale microfinance facility). The OBA subsidy will amount to US$5-16 per house- hold, and will be paid upon independent verification that The World Bank is facilitating the provision of loan prod- the agreed outputs have been achieved. The subsidy ucts to the two MFIs through a US$3 million OBA sub- will effectively reduce households’ weekly repayment by sidy to target poor households. Blending of concessional 11 percent. Loans can be paid off in weekly installments and commercial financing occurs as the grant is provided over a period of 55 weeks, allowing households to more directly to the MFIs, ASA, and PKSF, both of which use easily spread the cost of purchasing materials over time. their own funds to provide pre-financing to households. The partial subsidy both enhances the attractiveness PKSF provides wholesale loan financing to retail MFIs of borrowing by increasing access and affordability of (partner organizations) to finance household sanita- higher-quality options for poor households, and reduces tion loans and ASA provides sanitation loans directly to lending risk for the MFI. households. Households use the loans to pay trained and pre-certified local construction firms for hygienic FIGURE 1  Facilitating Access to Finance for Household Investment in Sanitation, Bangladesh: Financial Structure Legend World Bank (WSP) World Bank (GPOBA) Supply of Finance Grant Repayment Flows TA to PSKF Government of Public/Donor Agencies and ASA Bangladesh Private Financiers OBA Subsidy and Implementation Support Grant Service Provider Microfinance Institution TA/Other Microfinance Institution OBA Association for Social Palli Karma-Sahayak Foundation (PKSF) Advancement (ASA) Service Contract Subsidy Wholesale Lending Loan Sanitation Retail MFIs (Partner Organizations) Repayment Loans Loan Sanitation Loans Repayment Independent Output Poor Households Build Payment Local Construction Verification Agent Veri cation Hygienic Latrines for Latrine Firms Construction 2 Water Global Practice Case Studies in Blended Finance for Water and Sanitation: Facilitating Access to Finance for Household Investment in Sanitation in Bangladesh Complementary technical assistance will be provided through: (1) lowering the latrine cost; and (2) spreading through the Water and Sanitation Program of the World repayment out in weekly installments over the course of Bank under the GPOBA project. WSP implemented an a year, making it more manageable. earlier technical assistance program in Bangladesh to help poor households in rural areas access affordable, Well-designed subsidies can be catalytic for the high-quality sanitation facilities from small firms. The new development of rural sanitation markets. The strategic program will maintain features of the original, and will use of subsidies, for example for sanitation marketing or support demand creation and market promotion through to expand the reach of sanitation microfinance, can help awareness raising activities. It will ensure follow-up create a demonstration effect for sanitation lending at support to trained entrepreneurs to guarantee quality scale via other MFIs. construction, and help MFIs reach the poorest house- holds. Such technical assistance is likely to be critical to scale-up the approach and for sustainability. References Ikeda, J. and H. Arney. 2015. Financing Water and Sanitation Results for the Poor: The role of Microfinance institutions in addressing the water and sanitation gap. Water and The OBA project is expected to start implementation in Sanitation Program: Learning Note. World Bank: late 2016, so there are no concrete results to date. The Washington, DC. selected MFIs are in the process of developing special- Ikeda, J. and R. Ahmed. 2015. Building Markets for Rural ized loan products for low-income rural households to Sanitation: Lessons Learned in Bangladesh. Water and help them finance the purchase of sanitation systems, Sanitation Program. World Bank: Washington, DC. and to extend loans to microbusinesses trained on hygienic latrine construction and sale. WEF OECD. 2015. Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders. Geneva: World Economic Forum. The intervention aims to expand product availability by targeting the traditional constraints that limit access to World Bank. 2016. Bangladesh OBA Sanitation Microfinance finance for households. Projections indicate that approxi- Program (Project Paper). Washington, DC: World Bank mately US$22 million in household contributions will be Group. leveraged. Lessons Learned Providing OBA subsidies to microfinance institutions is one way of facilitating the expansion of sanita- tion microfinance by increasing the size of the client base that can afford to borrow. The resulting increase in sector investment allows sanitation entrepreneurs to increase their earnings, thereby enhancing sustainability, and in turn, expanding their offerings and services. The leveraging of grants helps cash-constrained households. Many households are willing and able to invest in improved sanitation solutions, but they are not able to mobilize sufficient funding to invest, and need assistance to be able to spread the costs of such an investment over time. The blending of OBA with MFI loans targets reducing this affordability constraint www.worldbank.org/water 3 Case Studies in Blended Finance for Water and Sanitation: Facilitating Access to Finance for Household Investment in Sanitation in Bangladesh This case study is part of a series prepared by the World Bank’s Water Global Practice to highlight existing blended finance experiences in the water sector. Blended finance refers to “the strategic use of develop- ment finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets,” as per the OECD definition (WEF OECD, 2015). Concessional funds can be used in a catalytic manner to open up new oppor- tunities for commercial financing, by providing technical assistance to borrowers and lenders to help them become more familiar with each other, help structure transactions, provide credit enhancement mechanisms, etc. Private capital flows can help with meeting immediate financing needs for investment in the water sector but ultimately need to be repaid. Repayable financing from private sources to the water sector can come in vari- ous forms, including as commercial bank loans, bonds or equity. To obtain such financing, water-sector actors need to be able to repay the borrowed amounts and the associated funding costs, which means that they need to be deemed “creditworthy” by providers of finance. Contact Us For further information please contact Joel Kolker (jkolker@worldbank.org) or Sophie Trémolet (stremolet@worldbank.org). 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